Estate Planning Considerations for Blended Families

Blended families have become common, raising additional complexity for estate planning primarily due to differences in family dynamics and objectives. A failure to take these differences into account often leads to acrimony and disputes, which may irreparably damage family relations and thwart the estate plan. To minimize disputes and to ensure objectives are fulfilled, it is important to build safeguards into the estate plan.

A domestic contract should be considered in the blended family context. Where the contract specifies each spouse's specific entitlements on death, planning for other beneficiaries, such as children from prior marriages, often becomes less complicated.

A common objective of blended family spouses is ensuring that the survivor, as well as children from prior marriages and relationships are provided for on death. In the blended family context, however, it is problematic for spouses to simply leave all of their estate to their spouses outright on death because the surviving spouse could alter his or her will after the other spouse's death to remove the deceased spouse's children as beneficiaries and, therefore, capital succession to the children is not protected.

One possible option to deal with this risk is for spouses to contractually agree not to alter or revoke their wills at any time without the consent of the other spouse (often referred to as mutual wills). This approach, though, is inflexible and does not have as solid of a legal base as the use of a trust. Mutual wills and a companion written agreement have their own set of risks and problems. For instance, a surviving spouse could deplete the assets of the deceased spouse's estate (e.g., by gifting assets to other family members), which would leave little or no assets for the deceased spouse's children.

It is generally preferable that the interests of the surviving spouse and children be separated as much as possible, and that they are not tied together.

The preferred approach, where there are sufficient assets and where it is not possible or appropriate to sever the interests of the surviving spouse and children of a prior marriage or relationship, is to incorporate a testamentary spousal trust and/or family trust into the estate plan. Restrictions would need to be placed on the trust to ensure capital succession to children, while at the same time providing for the current needs of the surviving spouse. The restrictions can be tailored to address each particular situation, taking into account the spouse's and other beneficiaries' needs and ages, and family dynamics.

Consideration of family dynamics is critical when appointing executors and trustees, as well as attorneys for property and personal care. For instance, where a spouse and the other spouse's children do not get along well (which may not be readily apparent), disputes can erupt if they are appointed together. It may be preferable as one option to instead appoint independent trustees to act alone or with the spouse and/or children, including a corporate trustee where appropriate. A failure to select a combination of the appropriate mix of family members as trustees can also defeat an estate plan, such as where a trust is controlled by one or more of the beneficiaries who are trustees and the trust provides broad capital encroachment powers, including in favour of themselves. In appointing executors and trustees, it is extremely important to be mindful that relationships between blended family members may not always be as strong as they appear or as the testator hopes for, and sometimes after a death there is a dramatic change and decline in relationships.

Special considerations also apply when planning for property that passes outside of an estate, such as jointly-owned property, retirement plans, and life insurance policies. It may be problematic, for example, to own property jointly with a right of survivorship. The surviving spouse is free to dispose of the property as he or she chooses which could result in the deceased spouse's children not receiving any share of the property on the surviving spouse's death. A careful balancing of all factors, including tax considerations, is important.

In Ontario, as well as other jurisdictions with similar laws, it is particularly important to review retirement plans and life insurance policies because marriage does not revoke prior designations, such as those made in favour of a former spouse. As well, consideration should be given to using life insurance policies as a way to separate the interests of a spouse and children of a prior marriage.

Planning for blended families includes its own special set of considerations. Many planning options that may be appropriate in the nuclear non-blended family context are not always so in the blended family context. It is important that each situation be assessed individually and safeguards be incorporated into the estate plan to minimize the possibility that it could be defeated and result in family discord.

- Christopher Kostoff

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.

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